For Immediate Release 99-72
New York Stock Exchange Failed To Enforce Floor Broker
Compliance; NYSE Agrees to Remedies
Washington, DC, June 29, 1999 -- The Securities and
Exchange Commission announced today that it simultaneously
instituted and settled an administrative proceeding against
the New York Stock Exchange, Inc. In its administrative
order, the Commission finds that the NYSE failed to enforce
compliance with federal securities laws and NYSE rules
prohibiting proprietary and on-floor trading by NYSE floor
broker members in violation of Section 19(g) of the
Securities Exchange Act of 1934. The Commission's Order
directs the NYSE to comply with undertakings to implement
various remedial measures for its floor broker regulatory
program and floor trading operations. The NYSE agreed to
the entry of the Order without admitting or denying the
Commission's findings.
Richard H. Walker, the Commission's Director of
Enforcement, said, "This action underscores that self
regulatory organizations, such as the New York Stock
Exchange, must vigilantly enforce the federal securities
laws and their own rules. Because the potential for fraud
and abuse has increased as the markets have expanded, now
more than ever the investing public needs to count on a
strong partnership among the self regulatory organizations
and the government in enforcing the law."
Carmen J. Lawrence, Director of the Commission's
Northeast Regional Office, commented that, "This case
demonstrates that an essential component of any regulatory
program is routine, random surveillance. Such surveillance
creates the presence of a `cop on the beat' which enhances
deterrence and detection of wrongdoing. The undertakings
ordered in this action, along with those remedial measures
already taken by the NYSE, should go a long way toward
improving the NYSE's floor member regulatory program."
In the Order, the Commission found that:
The NYSE failed, from 1993-1998, to detect and
halt illegal schemes in which groups of independent
NYSE floor brokers effected and initiated trades from
the NYSE floor in exchange for a share of the trading
profits and losses. Those schemes violated Section
11(a) of the Exchange Act and Rule 11a-1 thereunder,
and related NYSE rules, which prohibit NYSE members
from executing trades for their own accounts, accounts
in which they have an interest, and accounts over which
they exercise investment discretion.
In one such scheme, floor brokers received $11.1
million in unlawful profits by effecting and initiating
trades through a non-NYSE member broker-dealer, the
Oakford Corporation. To date, nine of these Oakford
floor brokers have pleaded guilty to criminal charges
arising from their unlawful trading, and three have
settled civil charges brought by the Commission. The
United States Attorney for the Southern District of New
York has stated that these nine defendants are among at
least 64 NYSE floor brokers who participated in profit-
sharing arrangements until 1998.
The NYSE's regulatory program suffered from two major
deficiencies:
(1) The NYSE failed to surveil for profit-sharing
or other performance-based compensation of independent
floor brokers. Since 1991, the NYSE understood that if
an independent floor broker were to share in the
profitability of an account, the independent floor
broker executing orders for that account on the NYSE
floor might violate Section 11(a)(1) of the Exchange
Act and Rule 11a-1 unless it could claim entitlement to
an applicable exemption.
(2) The NYSE suspended its routine independent
floor broker surveillance for extensive periods, the
longest of which lasted for two years, between 1995 and
1997. Although the NYSE continued to investigate tips
and complaints about floor brokers during these periods
of suspension, this was no substitute for a routine
surveillance program and the NYSE should have devoted
sufficient resources to conduct surveillance and
investigations simultaneously.
The NYSE has consented to remedial undertakings,
including:
* Improve Surveillance of Floor Members: The NYSE will
conduct biennial examinations of all floor members, maintain
random surveillance of floor members beyond that, and ensure
adequate staffing. Under the supervision of an Independent
Committee of its Board of Directors, the NYSE will create
new procedures manuals for surveillance, examination, and
investigation of floor members.
* Comprehensive Review of NYSE Rules and Procedures: The
NYSE will retain an independent consultant to study its
rules and regulatory procedures, and report the conclusions
of that study and suggested amendments to the NYSE's Board
of Directors.
* Electronic Order Capture: The NYSE will develop and
implement systems for the electronic capture of orders prior
to transmission to and representation on the floor through
execution.
* Education Program: The NYSE will ensure that its
members receive adequate education concerning obligations
and prohibitions under the securities laws and NYSE rules.
* Internal Audit: The NYSE will maintain its Regulatory
Quality Review Department as a substantial, independent,
internal audit staff.
For more information, see Litigation Release Nos. 15653 and
15743.
For more information, contact:
* Carmen J. Larwrence, Regional Director, Northeast
Regional Office (212) 748-8035
* Andrew J. Geist, Associate Regional Director, NERO
(212) 748-8186
* Barry W. Rashkover, Assistant Regional Director, NERO
(212) 748-8373
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